What Makes a Good Risk Manager?

By | June 15, 2016 5:14 pm

Trading is not really about prediction or being right or wrong. It is really about how much are you willing to risk to find out. It’s easy to take the approach of, ‘is this trade going to work or not’, and in reality, we can’t help but think that way on a certain level. But because we will never know before hand, and because protecting capital is rule number one, we must attend to risk management and have flexible expectations instead of thinking in terms of ‘prediction’.

A set-up with a 50% win rate does not mean that the next 6 out of 10 trades will be winners . An objective market statistic based upon the past can not become a market probability about the future unless the same exact market participants are present and continue to act in the same way. Each trade, and each moment in the market, is unique for this reason.
The main point here is that although entry location is important, its how much we are willing to risk that determines our account equity and consistency over time.

If the primary focus is on whether the trade is going to be right or wrong, the trader is beginning to go down the slippery slope of market prediction. Trading is not a business of predicting, it is a business that involves hypothesizing and risk management. The biggest and best traders understand the distinction between predicting versus hypothesizing and also understand that risk management is critical. The job of a short-term trader is to be prepared to act in your own best interest when price approaches a level that you have determined to be important for some reason.

In the final analysis, it could be said that good traders develop appropriate or realistic hypotheses and are good risk managers. Whereas, ‘predicting’ is what the typical unprofitable trader tries to do.

3 thoughts on “What Makes a Good Risk Manager?

  1. anand

    I like the word “Hypothesize” which means “make a really good educated guess.”It involves using your past knowledge and available facts to try and predict what might happen . It is more than a guesswork prediction…

  2. Yashpal

    Barmesh Bhai really Ur god for mi
    Last 5 years I lost 3 lacks but last 6 months only reading Ur post I am the don of share market sir coming to meet u love u sirji

    1. Bramesh Post author

      I am a normal person.. Am happy my analysis helped you in recovering your losses..


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